Even the most basic analysis of the returns and claims of alleged fraudster Bernard Madoff should have led investors to ask more questions than they did, according to the growing body of research on feeder funds into Madoff’s products.

US researchers Infovest21 said Madoff profited every quarter since 1996, and lost money in only five months. His equity market-neutral peers have fallen in 15 months since 2004 alone, according to database Hedge Fund Research.

Research last month by analytical software provider Markov Processes International of The Fairfield Sentry fund, which had all of its $7.3bn (€5.3bn) with Madoff, showed that over 20 years Madoff beat the S&P 500 share index each year by 20% on just 20% of the index’s volatility. As long ago as 2006 MPI concluded that Madoff’s returns were “most likely not real”.

A source close to Fairfield Sentry questioned the accuracy of MPI’s analysis.

Michael Markov, MPI’s chief executive, said his software could not reconcile Madoff’s returns with the stated investment strategy and markets involved. He said: “Also, you cannot maintain the same level of efficiency in all market conditions. Different models behave differently from time to time and the relationship between volatility and returns was unrealistic. If you have an outlier you need to investigate it, and you have to look at the fund versus its peer group.”

The Gateway Option Income fund, of similar age and strategy to Madoff’s, fell in 26 of 87 months analysed by one researcher, whereas Madoff fell in only three. Swiss private bank Union Bancaire Privée, which invested in Madoff, said the potential for losses seemed “very limited,” while a rival that did not invest said the lack of negative months “made it seem too good to be true”.

Madoff’s claim to offload his equities each month to buy treasuries might have countered suspicions about regulatory filings listing few shareholdings in large companies, which is what a $17bn manager would typically invest in. However, one analyst said moving wholly to cash each month was warning sign enough.

One fund lawyer said due diligence and testing of claims against market realities could play as prominent a role in legal cases stemming from Madoff’s alleged fraud as qualitative issues.
MPI’s analysis found Madoff correlated more highly to Bayou, a prominent case of hedge fund fraud from 2005, than to industry sectors within the S&P index.